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Li Ka-shing waves goodbye after announcing his retirement as chairman of CK Hutchison Holdings at a news conference in Hong Kong on March 16.   © Reuters
Cover Story

After Li Ka-shing, Hong Kong's property tycoons inherit tough market

Influx of mainland investors and push for affordable housing to squeeze profits

HONG KONG -- According to a legend passed around among Hong Kong's laborers, the city is protected by an invisible force field that keeps tropical storms from coming ashore during the workday. The source of this supernatural power, they say, is business magnate Li Ka-shing. But "Li's force field" is not a cause for celebration: Instead, it prevents Hong Kong's working people from having a day off, even during the typhoon season.

The joke is a reflection of Li's outsized power over Hong Kong and its economy. Every aspect of life in Asia's financial hub is touched by some part of Li's business empire, which began as a local property company and expanded into retail, transport, telecommunications and energy.

But the 89-year-old Li -- known as "superman" for his business savvy -- will finally relinquish control of his globe-spanning empire when he passes the baton to his son Victor Li Tzar-kuoi next month, after building a fortune of over $30 billion during a career spanning 78 years.

His retirement is a watershed moment for Hong Kong, marking the end of an era dominated by a handful of property tycoons in the former British colony. Their empires are now in the hands of sons or grandsons who have inherited vast fortunes, sprawling property portfolios and a nagging question: Can they run these companies as well as the founders did?

"Li Ka-shing's retirement marks the end of Hong Kong's tycoon era and also unfolds a new era," professor Joseph P.H. Fan of the department of finance at the Chinese University of Hong Kong said.

Hong Kong's property tycoons have shaped the city's skyline, but they now face succession and other challenges. (Photo by Masayuki Kozono)

Li was head of one of Hong Kong's "big four" families, along with Cheng Yu-tung of New World Development, Lee Shau-kee of Henderson Land Development, and Kwok Tak-seng of Sun Hung Kai Properties. Together, they shaped the territory's landscape since the 1960s, helping to transform a small fishing village into one of the world's most expensive property markets.

Fifty years on, the game has changed. The next generation is facing challenges on multiple fronts, including an influx of competitors from mainland China, government policies designed to tackle Hong Kong's affordable housing crisis -- and the pitfalls of running a family business once the patriarch has left the scene.

"The influence of the second generation, and their ability to generate returns, is difficult to live up to the level of the first generation," said Cusson Leung, managing director of Asia-Pacific equity research at JP Morgan. "The economic cycle has changed and the environment is different."

Lee Shau-kee, chairman of Henderson Land Development   © Getty Images

The success stories of the first-generation property tycoons cannot be replicated, Fan said. The next generation needs to figure out their own ways, since the unique conditions enjoyed by their fathers no longer exist.

A lack of developable land and an influx of mainland immigrants during the 1960s and 1970s were the key drivers behind the city's decades-long property boom, Fan notes. While the four tycoons started out in other industries -- Li ran a plastic flower factory, Cheng worked in a goldsmith shop, Kwok was a grocery wholesaler and Lee was in finance -- they were all early to spot the opportunity in Hong Kong property. They swiftly carved up the market and raised the threshold for others seeking to follow them.

Today, the four families collectively control more than half of the new residential competition in Hong Kong, with a market share of 70% in 2016 and 52% in 2017, according to JP Morgan estimates.

Real estate development remains one of the most profitable businesses in Hong Kong. But in what some see as a sign that the market is topping out, Li has largely stopped expanding his business in Hong Kong and mainland China and begun shifting his investment focus to more developed economies in the West.

In the past few years, Li has shed a string of mainland assets, including a commercial complex in Shanghai for 20 billion yuan ($3.18 billion). This led the People's Daily, the official mouthpiece of the Chinese Communist Party, to blast him as "ungrateful" and question his patriotism.

Speaking in March, Li dismissed the criticism as "ridiculous and illogical," noting his group's natural gas projects along coastal China. 

In late 2017, Li sold The Center, a skyscraper located in the heart of Hong Kong's financial district, for a record 40.2 billion Hong Kong dollars ($5.12 billion).

"With CK Assets [Holdings] selling The Center and other properties, obviously they are telling you what they think about Hong Kong property market," said Jonathan Galligan, head of Asia gaming and conglomerates research at securities firm CLSA, referring to the property arm under the billionaire's empire. "They believe that the right capital allocation strategy is to shift."

Li Ka-shing sold the Center skyscraper for a record HK$40.2 billion late last year in a move seen by many as his verdict on the future of Hong Kong's property market.   © Reuters

Li has been pursuing infrastructure and utility assets in Europe, Canada and Australia through another listed arm, CK Hutchison Holdings. Last year, 72% of its total revenue and 80% of its profits were generated outside Hong Kong and mainland China, according to the company's financial filings. Compared to property, Galligan said, these assets have a higher cash generation ability despite a lower growth profile.

"Historically, Li Ka-shing has been proved right most of the time in terms of picking time to sell assets," he said.

How long can it last?

Despite Li's shift away from real estate in greater China, the other three families have largely stuck to property. And for good reason.

Hong Kong's property market has seldom disappointed investors during the past 15 years. Residential prices have risen more than five times since 2003, while consumer prices only rose 43.5% during the period, according to official data.

Even after the city's leaders tried to rein in runaway property prices by rolling out of a series of cooling measures -- including a 15% stamp duty for all non-first-time buyers in 2016 -- the market continued to rise. Transactions last year hit a fresh 20-year high, with home prices surging 16.7%. The unexpected revenue from land sales and stamp duties left the city's financial secretary with a fiscal surplus of HK$138 billion -- eight times higher than he had estimated.

The seemingly unstoppable property market is the biggest driver for these tycoons' sprawling business empires. Sun Hung Kai Properties reported a 36.7% rise in underlying profits during the second half of last year, with property sales in Hong Kong almost doubling. New World Development's profits more than doubled to HK$11.27 billion in the six-month period thanks to a significant gain in property investments. Henderson Land Development reported a 39% increase in full-year profit to HK$30.8 billion, driven by robust property sales.

Buyers and property agents line up for a Sun Hung Kai property sale in Hong Kong on Jan. 13. Government efforts to cool the property market have had little effect.   © Reuters

Riding this cash cow, the game for their successors seems to be as simple as continuing what the families are comfortable with.

"We will be more aggressive in land auctions this year," Raymond Kwok Ping-luen, SHKP's second-generation owner, said this spring. "I hope the government will put up more land for sale."

An SHKP spokesman said the group is confident about the long-term prospects of the property markets in Hong Kong and mainland China, adding that they will "remain the focus of the company's investment in the future." The group was sitting on undeveloped land totaling 21.4 million sq. feet (nearly 2 million sq. meters) at the end of December, its highest level in a decade.

"The best kind of job in Hong Kong is property developer," said Alan Jin, head of property research for Asia ex-Japan at Mizuho Securities. "They have grown ... over the years with few challenges from outside. It is hard to find a second industry as profitable as properties in Hong Kong."

Sun Hung Kai Properties Chairman and Managing Director Raymond Kwok, left, and brother Thomas Kwok, who formerly served as joint chairman and managing director   © Reuters

He added that there is little incentive for the owners of the next generation to diversify the group's businesses or embark on bold reforms simply because the traditional model still works well.

However, other analysts warn that the Hong Kong property market faces increasing risks.

"High valuation of an asset class is extremely vulnerable to any unexpected shock," Leung of JP Morgan said in a recent report, noting that the rally in residential properties may have entered its "last phase." "Every cycle has its end, and this will continue to be an overhang in the market."

In addition, competition is rising as big mainland conglomerates expand in Hong Kong. Companies like Ping An Insurance Group and China Overseas Land & Investment have emerged as formidable forces in the Hong Kong government's land auctions, securing plots at record-breaking prices that blocked many of the city's developers from accumulating inventories.

In 2017, mainland companies purchased 70% of the city's land sold in government auctions, up from only 11% in 2013 and 14% in 2014. And the share of the top seven Hong Kong developers -- including the big four -- dropped from 45% in 2012 to only 22% in 2016, according to data compiled by property consultancy Jones Lang LaSalle.

Despite the recent retreat of mainland companies due to Beijing's tighter capital controls and clampdown on overseas investments, mainland investment in Hong Kong is a long-term trend, Mizuho's Jin said.

"Mainland developers have ample capital generated from nationwide operations. Hong Kong developers still mostly rely on revenues from their home market, a single city," he said. Even though some local developers have tried to expand across the border, Jin said they lack the local connections needed to be competitive.

On top of competition from mainland rivals, the political winds may be shifting against the Hong Kong developers. An aggressive government plan to increase the supply of housing in the coming years is expected to squeeze their profits.

Potential buyers look at models of apartments being developed by the Hong Kong government under a housing program that offers discounts of up to 60% on market value.   © Getty Images

In February, Financial Secretary Paul Chan Mo-po said the government aims to produce about 100,000 units of public housing in the next five years and accelerate the pace of rolling out land for private residential developments, with an estimated supply of 97,000 units in the next three to four years. If the goals are achieved, the annual production of private houses in Hong Kong will stand at 20,800 units in the next five years -- up by 50% over the average for the past five years.

Curse of the third generation

The Chinese have an old proverb: "Fu bat gwo saam doi," or "Wealth never survives three generations."

After Li retires in May, three of the patriarchs of the four big families will have stepped down from the leading roles of the business empires they started. (The 90-year-old Lee has already declared his succession plans for Henderson Land Development.) Whether their children will be able to break the ancient curse is a key question for the survival of these family-controlled conglomerates.

Regardless of how capable a successor may be, experts argue that a poorly planned and executed succession can cost a family its fortune.

Adrian Cheng, an executive at New World Development, is the grandson of company founder Cheng Yu-tung.   © Reuters

"The transition from the founders ... is by far the biggest challenge large business groups face," Morten Bennedsen, professor of family enterprise at INSEAD, said.

Unlike many family businesses in the U.S. and Europe, who hire professional managers to run their companies, Asian families are much more involved in day-to-day operations, he said. And the fact that patriarchs often stay on well into old age can leave successors unprepared to make decisions on their own.

"Traditionally the Chinese culture has been very male-dominated, emphasizing the respect for the senior members. The younger ones never challenge the older generation," Bennedsen said.

Once the powerful patriarchs leave the scene, governance problems can quickly surface and family disputes sometimes spill over into the boardroom.

When Kwok Tak-seng died suddenly of a heart attack in 1990 at the age of 79, he was still very much involved in running SHKP, the company he had founded. Under Kwok's leadership, his three sons worked together to build one of the largest property empires in Asia. But since 2008, the family has been embroiled in a bitter fight.

Sun Hung Kai Properties Executive Director Adam Kwok is the nephew of Chairman Raymond Kwok.   © Reuters

Walter Kwok Ping-sheung, the eldest son, was ousted from the board after leading the company for 18 years. Both of his siblings were later charged with misconduct in relation to a graft case. Thomas Kwok Ping-kwong was convicted and is serving a five-year prison sentence, leaving the youngest son, Raymond, to run the business.

"The three brothers in the Kwok family are all very strong at running businesses. The problem is that they didn't know how to work with each other and mediate disputes when their father was gone," professor Fan of CUHK said. This situation is common with Chinese family businesses, he said.

The children of tycoons also often lack the "intangible assets" of the older generation, including their ambition, reputations and political connections.

Unlike Western economies, which have more transparent competition rules and legal systems, Fan said, the way Chinese conduct businesses is still very much relationship based. "It's hard to imagine any second generation can have the kind of connections and reputation Li Ka-shing has in China," he said.

A study of more than 65 deals led by Victor Li showed that he performed better in developed markets than in emerging markets -- including mainland China. According to Fan, Li Ka-shing decided to shift some investments overseas to make things easier for his son, who was educated at Stanford University and worked in Canada for several years before he returned to Hong Kong in 1990.

"When the founders realize they can't pass on the intangible assets, the more sensible approach is to shift focus to places where the successors have better knowledge and potential, like Li did."

The news of Li's retirement caused little change to the share prices of his two listed companies, but that is very rare, according to Fan. His study of 217 Chinese-run listed companies across Asia showed that they lost 60% of their value in their first transfer of power following the founders' retirement.

"The challenge for the next generation is an environment that has grown far more global and far more competitive than what the previous generation had to deal with," Galligan of CLSA said. "If they do exactly what their fathers did they won't be successful, because the world has already changed."

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